TheChek News Flow

Nikkei +0,67% Hang Seng +0,01% CSI -0,69% Shanghai -0,31% Shenzen -0,12%

Eur$ 1.0405 CNH 6,8100 CNY 6,7925 JPY 128,93 GBP 1,2247 CHF 1,0026 RUB 64,7063 TRY 15,4982 WTI$ 108,34 Gold 1,808,8 BTC 30,400 - 1,8% ETH 2,075 -2%

S&P -0,44% Nasdaq -0,45% EuroStoxx -0,24% FTSE -0,35% Dax -0,17% SMI +0,09%

Macro :

- $11 Trillion and Counting: Global Stock Slump May Not Be Over

- NATO Lauds Historic Moment as Finland Applies to Join Alliance

- EU Drafts Plan for Buying Russian Gas Without Breaking Sanctions

- Missing Billions Threaten to Break Britain’s Energy Market

Keep an eye on :

- AZN LN : AstraZeneca Says PT027 Cuts Risk of Severe Cases of Asthma

- CS FP : Axa, Swiss Life Acquire Lyntia Networks for Over EU2b: Expansion

- BSGR NA : B&S Group 1Q Revenue EU453.3M Vs. EU395.6M Y/y

- BP/ LN : UK North Sea Sees Chance for Political Reprieve in Energy Crisis

- CO FP : Casino Confirms Has Launched Process to Sell GreenYellow

- DTE GY : Deutsche Telekom Stake in Greece’s OTE Rises to 50%

- HOLN SW : Holcim Sells India Arm to Billionaire Adani in $10 Billion Deal

- HOLN SW : Funding for Green M&A May Justify Holcim's India's Exit: React

- NEXTA BB : Nextensa 1Q Net Income EU21.8M

- RNO FP : Renault Sells Lada Maker to Russia With Option to Buy it Back

- REP SM : Repsol Says Peru Agency Suit ‘Unfounded’ After $150M Spill Tab

- RYA ID : Ryanair FY Loss After Tax EU355M, Est. Loss EU372.3M

- S92 GY : US Deepens Solar Tariff Probe With 8 Firms Facing Added Scrutiny

- GLE FP : UniCredit, Citigroup Explore Asset Swaps to Exit Russia: FT

- SUN SW : Sulzer to Temporarily Suspend Polish Activities on Sanctions

- SLHN SW : Axa, Swiss Life Acquire Lyntia Networks for Over EU2b: Expansion

- TSLA US : Musk Considers Indonesia Trip to Explore Possible Investments

- TSLA US : Tesla Delays Plan to Restore Shanghai Plant Output: Reuters

- UCG IM : UniCredit, Citigroup Explore Asset Swaps to Exit Russia: FT

- VLA FP : Valneva: EU Signals Intent to End Advance Deal for Covid Vaccine

- VLA FP : Valneva Covid Vaccine Gets Emergency Use Authorization From UAE

- VOD LN : UAE Telecom Firm e& Pays $4.4 Billion for 9.8% of Vodafone (3)

Despite all the gloom and doom talk — about how higher rates force long-duration assets down, a regime shift towards value stocks, and how big tech is reaching the end of its high-growth phase — the Faang stocks still matter a lot. Let’s have a look at how they have done this year:

Not well! Is a buying opportunity forming?

Two things to note at the outset. First, the Faangs are now technically the Faamgs. The streaming company may yet make a comeback, but its recent troubles have proven once and for all — to Unhedged, anyway — that Netflix is a media company, not a tech company, and does not belong with tech’s big dogs. Microsoft’s multiyear re-emergence as a cloud computing power, on the other hand, shows that it is perfectly at home among the four younger companies.

Second, Unhedged is still grouchily denying that Google now calls itself Alphabet and that Facebook goes by Meta. Google is still a search advertising company, Facebook is still a social network. We are not fooled by inane rebranding.

Why do the Faangs matter so much, and why should we be alert to a chance to buy them at a discount? To start with, they represent a fifth of the S&P 500, with a market capitalisation of $7tn. As they go, the market will (largely) go. Further, huge companies should be able to use their market position and abundant resources to defend their margins in tough periods such as the one we are sliding into now.

And despite all being tech companies broadly speaking, the Faangs are quite a diverse group of companies. Microsoft and half of Amazon (depending on how you slice it) are computing companies that cater to businesses. The other half of Amazon is a global (but quite domestically tilted) e-retailer. Google is a quite cyclical search advertising provider that caters to business. Apple and Facebook are thoroughly global consumer tech companies, one built around a dominant hardware franchise, the other around advertising against a no-longer-dominant but still immense social network.

They are all, with the arguable exception of Amazon, immensely profitable. They produce more free cash than they know what to do with. This means the argument (a canard at the best of times) that tech stocks must go down as rates rise cannot possibly apply to the Faangs. They likely derive as much of their value from near term profits as the oil companies, consumer staples brands and banks that fill up value portfolios.

A look at the five groups’ recent drawdowns, valuations and growth rates:

To my eye, the two of the five that have fallen the most still look the most expensive. The dramatic slowdown in growth at Amazon’s e-retail business may turn out to be temporary payback for its staggering growth early in the pandemic, but I do not fancy paying over 50 times earnings to find out. Facebook has a low price/earnings ratio and generates a lot of cash, making it look like a value stock, but does the market want to value it on cash flow? Or will the whippings continue until revenue growth (7 per cent in the first quarter) improves?

Of the other three, which would you want to own if we are heading for a recession next year? Google’s core business is quite cyclical. Apple’s is dependent on a fast-slowing China for a fifth of its sales. Microsoft’s strong position with business customers, by contrast, will be very appealing in a slowdown.

These are just generalities, of course. I think the overall point can be summed up by saying this: these are all remarkable companies, and while they are not cheap yet, they are a hell of a lot cheaper than they were, and the fact that the zeitgeist is now anti-tech should not discourage us from watching them closely as the current bear market plays out. There will be a moment to pounce.

Here is a useful contrast. The Faangs, in market cap terms, are numbers 1, 2, 3, 4 and 7 in the S&P 500. Here are numbers 8, 9, 11, 12 and 14, which will also enjoy all the advantages of being absolutely immense companies:

Here are a diversified healthcare company (in pharma, medical equipment, and consumer goods), the biggest health insurer, half of a payment duopoly, a vast value retailer, and a collection of strong consumer staples brands (Pampers, Tampax, Gillette, and so on). It’s a classic basket of defensives — yang to the Faangs’ yin. A neat acronym does not suggest itself, unfortunately (we’re open to suggestions). 

The price/earnings valuations of the two groups are similar, and while the defensives’ recent growth has been weaker, outside of Visa, we could see a convergence in a recession. Also the lower volatility of the defensives is attractive (“beta” is a measure of volatility relative to the wider market, with “1” representing market volatility, 1.2 representing 1.2 times the market’s volatility, and so on). So far in this bear market, the defensives have outperformed, again with the exception of Visa (the S&P is off 16 per cent from its high).

(You may wonder what happened to numbers 5, 6, 10 and 13 in the S&P’s market cap ranking. They are Tesla, Berkshire Hathaway, Nvidia, and Exxon. They all have tricky features that made the comparison less tidy).

A challenge for readers. Over the next year, which basket will perform better, the Faangs or the defensives? The pessimist in me picks the defensives, but only over the next year or so. At some point, and it may be sooner than you think, it will be time to switch back to the big tech companies that have driven the market over the past 10 years.

Russia’s invasion of Ukraine has ushered in historic policy change that is backed by public

There can be no other word for what happened in Finland and Sweden this weekend but “historic”.

For decades in Finland’s case and centuries in Sweden’s, the thought of joining a military alliance was all but impossible. Now, in the 81 days since Russia launched its full-scale war against Ukraine, the situation has changed so dramatically that Sweden and Finland are rushing into Nato with large majorities in both their parliaments and populations backing them.

“It’s a big step in our western integration, it is finalising it. Yes, for the country it’s a change in paradigm,” said Tytti Tuppurainen, Finland’s EU minister.

But she also added: “You could interpret it as a very natural process as well. It’s no wonder that Finnish public opinion turned in such a short time. It tells the story of decades of preparation. In that sense, it’s not any giant step. When the time was right, the readiness was there.”

Finland has a history of using periods when its larger neighbour to the east is distracted or weak to make big decisions. It declared independence in 1917, weeks after the Bolsheviks seized power in Russia.

“We’ve always tried to adjust, and when there’s a window of opportunity we’ve tried to use it,” said Elina Valtonen, deputy head of the main opposition National Coalition party, a longtime supporter of Nato membership.

Finland’s government, together with the President Sauli Niinistö, took the decision to apply on Sunday. Parliament is likely to ratify the move on Monday or Tuesday by a huge majority, and the application could be sent jointly with Sweden on Tuesday or Wednesday when Niinistö makes a state visit to Stockholm.

The scale of the change is far bigger in Sweden. Its 200 years of military non-alignment have left a deep imprint in the DNA of many Swedes, especially those in the governing Social Democrats party. They decided on Sunday evening to jettison that and seek Nato’s embrace, not least because Finland was doing so.

“Sweden would end up in a very vulnerable situation if we alone chose not to apply for Nato membership,” said Prime Minister Magdalena Andersson.

In Helsinki, Finland’s assured progress towards Nato membership has been a triumph for its brand of serious policymaking, which has long set store on being prepared for the long term and never letting their guard down on Russia. There is a sense among many that Sweden is benefiting from Finland’s hard work, including the diplomacy to win over the 30 existing Nato members. “They will owe us big when this is over,” said one Finnish official.

Finnish politicians are expecting “speed bumps” on the road to membership — such as Turkey’s potential opposition — but are convinced these can be overcome, and that within 4-12 months they and Sweden will be members. Nato officials have promised a smooth process and that both countries could be formal invitees, able to attend all meetings, in just a week or two.

Reprisals from Russia — possibly in the form of cyber or hybrid attacks — are possible but Finnish officials are so far pleasantly surprised that Vladimir Putin has not done much to influence their decision. “No Finn has to be threatened or feel insecure — whatever comes we’re prepared,” said Valtonen.

Niinistö said the change for Finns would not be so obvious in daily life, but more in their heads. “If you know that you have a secure country to live in, and build and work, that has an impact to all of your behaviour. Even if you don’t remember it daily, it gives security of mind. It is of huge importance,” he added.

Prime Minister Sanna Marin said it would “change some things but not others”. One area where it could well have an impact is Finland’s assertiveness towards Russia.

For decades in the cold war, Finland was forced to adapt its policies to keep the Soviet Union happy, leading to the term Finlandisation, a hated expression in the country today. In the decades since, it has striven to keep good relations with Russia, something now shattered.

Niinistö, known for his sometimes gnomic utterances, has been clear and direct over Russia’s responsibility for Finland’s Nato membership. “You caused this. Look at the mirror,” he said his message would be to Russia on Wednesday.

Valtonen said: “You can see it in the rhetoric. Traditionally Finnish foreign policy rhetoric has been almost cryptic. Now it’s open and straightforward. The biggest change is in the mind. We are finally free for real.”

Tuppurainen agreed: “This is a new Finland. Everybody understands that appeasement doesn’t work any more. At last this is the time where we can talk about Russia and its regime with frankness. It’s a totalitarian regime.”

Finns and Swedes alike have been at pains to insist that their decisions are being taken to maximise their own security, and are not against Russia or anybody else. They are also set to boost the security for the three Baltic states by making them easier to defend.

But there is also a clear sense that one of the biggest consequences of Putin’s invasion of Ukraine will be to make northern Europe and the Baltic Sea a Nato area — just what he wanted to avoid.

Tuppurainen added: “When we saw the true face of alleged war criminal Vladimir Putin, Finns decided now is the time to use the option. It’s a one-of-a-kind opportunity. If you don’t use this option now, it might be gone forever.”

Consumer and industrial output fall sharply illustrating toll of Xi Jinping’s coronavirus strategy

China’s economic activity contracted sharply in April as a wave of lockdowns across the country posed the most significant challenge to its growth prospects since Covid-19 emerged over two years ago.

Retail sales, the country’s main gauge of consumer activity which had already entered contraction in March, slumped 11.1 per cent year on year, compared with forecasts of a 6.6 per cent fall from economists polled by Bloomberg.

Industrial production, which underpinned China’s rapid economic recovery from the initial Covid shock in early 2020 and was expected to rise slightly despite the recent restrictions, dropped 2.9 per cent.

The data are the most striking sign of the rising economic toll from China’s approach to coronavirus, which it has sought to quash through citywide lockdowns, mass testing and quarantine centres. The elimination of infections is a priority for President Xi Jinping ahead of his bid for a third term in power this year.

The zero-Covid strategy had largely contained the virus over the past two years but authorities have escalated their implementation of the strategy dramatically in 2022 following an outbreak of the highly infectious Omicron variant, mainly centred around Shanghai, which was locked down in late March.

Dozens of cities and hundreds of millions of people across China have been placed under full or partial lockdowns as part of a policy that is expected to have deep ramifications for global supply chains.

China’s economy was already been under pressure from a liquidity crisis across its highly leveraged real estate developers and a wider property slowdown as home sales collapsed.

Over the weekend, the government effectively cut mortgage base rates for new lending to first-time buyers from 4.6 per cent to 4.4 per cent, the latest in a series of easing measures intended to support one of the country’s most important economic drivers.

“The government faces mounting pressure to launch new stimulus to stabilise the economy,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, adding that the mortgage rate cut was “one step in that direction”.

But “the effectiveness of these policies depends on how the government will ‘fine-tune’ the zero-tolerance policy against the Omicron crisis”, he said.

Asia markets reversed early gains on Monday to trade lower following the data release. China’s CSI 300 of Shanghai- and Shenzhen-listed stocks opened 0.7 higher but fell 0.8 per cent after the data release, while Hong Kong’s Hang Seng index rose 1.1 per cent before dropping 0.4 per cent.

Last week, authorities said citizens would not be able to leave the country for “non-essential” reasons and introduced more severe measures in Shanghai almost seven weeks after a citywide lockdown was introduced. A city official said on Monday that authorities aimed to broadly reopen Shanghai from June 1.

China’s gross domestic product rose 4.8 per cent year on year in the first quarter. The government has targeted growth of 5.5 per cent for the year, its lowest official target in three decades. Economists have already slashed growth forecasts for the second quarter.

Analysts at Australian bank ANZ maintained a 5 per cent growth target for 2022 on the basis that stimulus will “offset the loss of economic activity in the past two months”. But they were “pessimistic about China’s medium-term outlook” given expectations that supportive measures will be unwound next year.

“The impact of Shanghai’s lockdown is far-reaching,” they wrote. “Economic and technological linkage with the rest of the world is at risk”.

The surveyed unemployment rate was 6.1 per cent in April, its highest level since February 2020.

- Cut 2023 US GDP growth forecast from 2.2% to 1.6%

- Preliminary results showed the SPD had 28% voting share in North Rhine-Westphalia elections, with the conservative CDU had 35%

Meta must move fast to get its head in the VR game

Investors are not yet won over by the metaverse, but if Zuckerberg succeeds in selling his dream it could revive the company

For years, one of Facebook’s biggest problems has been its refusal to acknowledge how much it is disliked by the public. Users might keep their accounts open but goodwill is in short supply. A sell-off in shares has made it harder to ignore. But don’t count Mark Zuckerberg out just yet.

Let’s get the bad news out of the way first. Facebook, now called Meta, is the worst-performing Big Tech stock of 2022. The share price is down 41 per cent this year, a bigger drop than Apple, Alphabet, Microsoft or Amazon. In April, the market valued Meta at 14 times expected earnings — a record low. A rare dip in users and slowing sales growth has investors wondering if the gigantic advertising business is running out of steam.

But Zuckerberg has form when it comes to defying expectations. In 2009, in the wake of the financial crisis, he swapped his signature hoodie for a suit and tie to signal how seriously he took the business. After a botched market listing in 2012 he got better at managing investor expectations by underpromising and overdelivering. Now he has to learn how to sell his vision of the future.

Zuckerberg is one of Big Tech’s last founders turned leaders. He retains absolute control over the company thanks to shares with majority voting rights. That gives him the ability to make sweeping decisions other companies might hesitate to execute. Facebook’s brand is toxic? Change the name to Meta. User growth is stalling and everybody’s watching TikToks? Go all in on the metaverse.

Facebook’s rebrand not only managed to drag attention away from whistleblower accusations about safety, it made the metaverse into a global topic of conversation. But it is still not clear what Zuckerberg wants that metaverse to be. Is it somewhere we visit or a world we inhabit full time? Will it replace Meta’s existing revenue or expand it?

Zuckerberg lacks the allure of Elon Musk, whose Twitter musings on the future of electric cars, life on Mars and free speech can channel billions of dollars of investment and lead global news. On Facebook, Zuckerberg may have more followers than Musk has on Twitter, but his posts do not generate the same attention. The metaverse is a technologically difficult project too. Visual effects are not lifelike and headsets are bulky. Strapping them on means shutting everything else out. No checking your phone or going for a walk at the same time.

What works in Meta’s favour is the lack of exciting consumer tech elsewhere. I’m old enough to remember when friends would drag you over to admire their colourful iMacs. What is today’s equivalent? New smartphones are just slicker versions of the last. Self-driving cars are not yet for sale. The answer could be virtual reality.

I have a first-hand example. This year, my dad bought a VR headset from Meta. It has since been taken to family parties, coffee shops, neighbour’s houses and the golf course so that everyone can try it out. He uses it every day, watching the swirling graphics on a meditation app. His only complaint is that most apps are games. When there is more to do with a VR headset, he’ll do it.

The headsets are not yet mainstream, which may be why interest is still limited. This year, National Research Group interviewed 2,500 US consumers about virtual reality. Only one-third were excited about its potential. But that figure might be higher if more people tried it. Of those who did, 86 per cent had a positive experience. That could well make them feel more attracted to Meta too.

Still, it’s reasonable to ask why the revolution is taking so long. Zuckerberg purchased VR gaming company Oculus back in 2014. Sales are still low. Data from the International Data Corporation found that although Meta’s $299 Quest 2 was the most popular headset on the market, it sold fewer than 9mn units last year.

Project Cambria, Meta’s code name for a mixed reality headset, might find a bigger audience. Mixed reality overlays digital images on the real world — making it more practical to experience virtual reality without tripping over your shoes. But this headset, expected later this year, will also be more expensive.

Meta is caught between wanting to get affordable headsets to the market as soon as possible and spending more time and money working on the tech that will get users hooked. Reality Labs, the company’s metaverse division, accounts for just 2.5 per cent of total revenue but lost $3bn in the space of three months this year.

To keep the pace of investment going, Zuckerberg needs to find a better way to explain his dream. Truly immersive virtual reality is an expensive, speculative project that may not pay off for years to come. Then again, that’s exactly what Silicon Valley was made for.